A strategic bitcoin reserve raises real national security concerns

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Exploding pagers, the FBI secretly operating a cellphone platform and a Chinese state-sponsored hack of U.S. Treasury Department computers. These supply chain attacks and cyber operations may sound like fiction out of a spy novel but are today's national security reality.

The debate surrounding a U.S. bitcoin strategic reserve has given scant attention to national security. Evaluations of President Trump's campaign pledge to create a "strategic national bitcoin stockpile" must consider supply chain attacks and cyber threats that could endanger national security.

A strategic reserve is a supply of a systemically important input — available if needed — and is intended to strengthen national security during a crisis. The U.S. strategic petroleum reserve is one such example. Setting aside whether bitcoin is systemically important, questions remain whether a bitcoin reserve strengthens national security and will be available if needed.

President Trump said he wants bitcoin to be "mined, minted and made" in America. However, China has a near monopoly on bitcoin mining infrastructure.

To better understand bitcoin's supply chain and cyber risks, it is helpful to first be familiar with a few terms: rigs, miners and pools. Rigs are specialized computers used to process bitcoin transactions by solving complex puzzles. Miners own and operate the rigs and are rewarded with bitcoin if their rig solves the puzzle first. Pools combine the computing power of miners' rigs to increase their chance of solving the puzzle.

Rigs are almost exclusively produced by Chinese firms, with one Chinese company accounting for 90% of the market. Rig software was previously found to have back doors which would allow for remote access. Rig cyber vulnerabilities could potentially be exploited by any number of actors including the Chinese Communist Party and North Korea.

National security risks posed by Chinese rigs were highlighted in a recent executive order in which a bitcoin mine in Wyoming was forced to shut down, pack up and sell the facility.  The order noted "the presence of specialized and foreign-sourced equipment potentially capable of facilitating surveillance and espionage activities, presents a national security risk to the United States."

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Miners power rigs located in the U.S. with American energy resources. This potentially exposes the U.S. to yet another cyber risk as the CCP could induce blackouts by remote access to these energy intensive computers. However, this tactic may be overkill since the CCP, through its Volt Typhoon operation, has already hacked directly into the U.S. energy sector.

To be sure, bitcoin rigs fall onto a long list of Chinese products that potentially pose national security risks ranging from home routers to cargo cranes to telecom infrastructure. However, in these other instances, the U.S. government is seeking to reduce — rather than amplify — reliance on these Chinese products.

In addition to dominating bitcoin mining hardware, China looms large in bitcoin mining pools. The operators of mining pools select transactions for member miners to process. Operators usually select transactions to maximize profits. However, an operator can also ignore or blacklist transactions from certain bitcoin addresses.

When a group of miners control the majority of bitcoin computing power, they can launch a cyber operation called a 51% attack. This type of attack can manipulate the bitcoin blockchain in various ways including preventing new transactions from being confirmed and reversing transactions. This year, Chinese-operated mining pools controlled over 58% of bitcoin computing power.

Merging the Chinese monopoly on rigs and majority control of bitcoin computing power, the national security risks to a strategic bitcoin reserve should be clear. Possible scenarios include the CCP knocking American miners offline, overwhelming the U.S. power grid, reversing or blocking U.S. strategic bitcoin reserve transactions, or simply banning the export of rigs to the U.S. These scenarios would result in America's strategic bitcoin reserve rendered unavailable during a time of crisis.

Just as, undoubtedly, Americans would balk at a strategic petroleum reserve that is dependent upon Iranian-built pumps and transported using Iranian-controlled pipelines, Americans should reject a bitcoin reserve that is dependent upon China.

Potentially, some of the national security concerns could be addressed by ensuring that U.S.-manufactured hardware and software unadulterated by the CCP is exclusively utilized for bitcoin "mined, minted and made" in the USA. However, increasing the market share of American-made bitcoin infrastructure would require a major shift in investment and should spur debate about whether this is where American ingenuity and resources should be directed.

Put simply, a bitcoin strategic reserve relying on the current state of bitcoin infrastructure could endanger national security by placing China in de facto control of American reserves.